The Economic Role of Hedgers and Speculators in the Commodity Futures Markets

By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School

This article notes how the terms, “hedging” and “speculation,” are not precise. What futures markets accomplish is the specialization of risk-taking rather than the elimination of risk. In addition, this paper discusses how there is some empirical evidence to support the theory that speculative involvement actually reduces price volatility. This article also explains that even when commodity futures markets are viewed as “hedging” markets, there is still a vital role for speculators because there will not always be an even balance of short hedgers and long hedgers at any one time: speculators are needed to balance the market.